The intricacies of regulatory capture
Regulatory capture warps rules to favor powerful interests, creating trade-offs between expertise and democratic accountability.
In a nutshell
- Regulatory capture distorts rules from the public interest to special groups
- It can reduce uncertainty and boost innovation
- Bureaucrats gain power via mission creep and regulations
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Lawmaking has often been compared to sausage-making: It can be an ugly, complicated process hidden from public view, so it is better not to know how it is done. When the regulatory process is swayed from its intended purpose of serving the general interest, it raises concerns of regulatory capture. Regulation is justified by market failures, including negative impacts on third parties and a lack of competition.
The political left views large corporations as pushing for regulations that benefit them, which fuels anti-capitalist criticism and spurs demands for stricter oversight. Free-market advocates agree with the analysis, but they advocate far less regulation.
The issue has gained attention with the rise of Big Tech, Big Pharma, agritech and finance. These sectors are often seen as pushing deregulation, overly favorable regulations or rules that disadvantage competitors. Pundits often argue that regulatory capture comes from regulated industries and affects a benevolent regulator. The story is more complex though.
The genesis of regulatory capture
The first famous theorization of the concept was probably Nobel Prize-winning economist George Stigler in 1971. According to his analysis, regulatory agencies were designed and established to protect cartelized industries. These agencies tend to create barriers to entry, fix prices and impose costly regulations that newcomers must navigate, as exemplified by restrictive truck regulations in the United States enacted in the 1930s to safeguard railway freight.
The development of public choice theory, which envisions politics not essentially as a matter of moral benevolence but as a matter of power incentives, helped explain why. Politicians seek support for their campaigns through donations, particularly in the U.S. This practice allows various groups to engage in lobbying and pursue rent-seeking activities, as seen in the U.S. Congress. Lobbyists, typically representing producers, aim to obtain favorable conditions, such as subsidies or tax breaks, from policymakers. They may directly influence regulations that not only benefit their own interests but also put their competitors at a disadvantage.
While consumers and taxpayers ultimately shoulder the substantial costs of lobbying – spread out in tiny amounts per person – this very fact creates a strong disincentive for them to counter-lobby. Compared to the public, organized lobbies have far lower organizational costs relative to their benefits.
Capture also targets regulatory agencies, such as the European Commission, even in the absence of electoral pressures. Since regulated firms possess informational advantages regarding their operations, constraints and increasingly complex technicalities, they are more likely to act opportunistically. They can transmit self-serving information when regulators outsource expertise to them to develop technical standards (in digital sectors for example), compliance and audit requirements (in banking and digital fields), taxonomy rules (defining what qualifies as “green” under the European Union Green Deal) and more. This raises barriers for new entrants and protects incumbents.
Revolving doors between regulated industries and regulatory agencies can lead to conflicts of interest for regulators. When regulators leave an agency for higher-paying jobs in regulated industries, it raises questions about the integrity of their prior oversight or vice versa.
It is estimated that around 50,000 lobbyists are registered in Brussels. Four tech giants each spend more than 100 million euros per year on lobbying the EU. An EU Parliament report noted that in 2022, about three-quarters of Google and Meta’s lobbyists in Brussels had previously worked in the public sector, specifically the European Commission or the European Parliament. Some 13,000 lobbyists were registered in the U.S. in 2024.
When influence can be beneficial
A few years after Stigler, Sam Peltzman proposed an “open” theory of regulation, insisting that politicians maximize support from their voters (as consumers) as well as from contributing lobbies.
Another Nobel laureate in economics, Gary Becker, pointed out that lobbying is not just the domain of firms; it can also be wielded by consumer and environmental groups, unions and taxpayers if they can organize. Although he concludes that regulators and the government tend to favor the politically powerful, the competition among these groups can drive efficiency. In a democracy, lobbying serves the important purpose of ensuring that various voices and interests are heard, making it a vital part of the process. What truly matters is that this lobbying remains transparent, open and competitive.
Given the complexities and practical challenges businesses face, regulatory capture ensures that regulators have a clear understanding of these issues and do not implement rules that are unrealistic, overly expensive or impractical. It also reduces firms’ uncertainty about regulations and expedites formal regulatory processes, thereby encouraging innovation. However, this form of co-regulation must remain open and transparent.
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Indirect capture
Capture has become increasingly subtle, rather than the simplistic view sketched earlier. It often uses indirect levers, for example influencing audit firms whose work is used to devise regulation, or the negotiations of commercial treaties that will trump national laws.
In unlikely “Bootleggers and Baptists” alliances, as outlined by economist Bruce Yandle, bootleggers – such as the mafia – can take advantage of the moral crusades led by Baptists, like Christians advocating for alcohol prohibition. The regulations imposed often result in significant profits for bootleggers (from illegal black-market sales). A more recent example can be seen in various cities where the hotel “lobby” has thrived thanks to politicians who have enforced bans on Airbnb rentals.
The concept of cultural or cognitive capture is crucial. This includes the seemingly informal relationships that develop between regulators and various stakeholders, where a particular worldview or culture is subtly ingrained, ultimately leading to more favorable regulations. Furthermore, paid influencers on platforms like YouTube can propagate specific narratives – whether advocating for more or less regulation – that resonate with the public, who then cast their votes accordingly. The funding of select scientific studies, along with the strategic placement of lobbyists on scientific and ethics committees, serves to sway those who influence decision-makers.
External capture
The pessimistic view of regulatory capture was reinforced by the development of the economic theory of bureaucracy, which shed light on the capture of the “bureaucrat regulator.” Economist William Niskanen characterized bureaucrats as aiming to maximize the size of their institution’s discretionary budget, which is the difference between production costs and the funding granted by authorities. A larger budget translates into greater power, increased salaries and so on.
Regulating power can attract favors, usually in kind, from lobbyists. This dynamic can lead to a kind of clientelism among bureaucrats, a conflict of interest that pulls them away from serving the public good. Such public-private networks partly explain the inertia noted by historian Robert Higgs: Bureaucracies inflate in times of crisis or war but rarely go back to their original size when normal times reappear (the ratchet effect). In 1961, U.S. President Dwight Eisenhower cautioned against such anti-democratic trends in his famous speech about the military-industrial complex.
Expanding regulatory power through mission creep – invoking new threats or issues that need to be regulated for the general interest – is a possible bureaucratic growth strategy. Increasing regulatory complexity in that context benefits bureaucracies. However, it also benefits private entities that capitalize on it, such as specialized auditing firms and law practices.
Governments and politicians can also be interested in capturing regulation to reinforce their power. Political entrepreneurs can threaten firms with regulation to extract rents. Externally capturing regulation in some tech or finance sectors can help increase population control via data collection or give governments more fiscal leeway via disproportionately easier borrowing.
Scenarios
Even though regulatory capture (whether direct or indirect) might bring certain advantages, it raises an important question: Who oversees the regulators? There are various mechanisms in place to prevent undesirable regulatory capture, and these can significantly influence future scenarios.
Most likely: Overregulation fuels deeper, subtler regulatory capture
The increasing complexity of sectors such as artificial intelligence widens information asymmetry between regulatory agencies and firms, making capture easier. Simultaneously, these sectors are central to the new geopolitical landscape. With shifting geopolitical blocs, industrial policy and strategic autonomy have regained prominence.
This inevitably leads to strengthened connections between governments and national champions in strategic fields such as AI, digital technology and energy. This development will render the concept of overregulation outdated, making it easier for companies to influence policies. Ultimately, we may move toward a system of co-regulation, as seen in agriculture. This is the more likely scenario, and the challenge will be to keep such close relations open to accountability.
Likely: Reduction in blatant, direct influence
Courts and audit offices, both in the EU and beyond, play significant roles in holding the executive and legislative branches accountable through investigations and impact assessments. Of course, their ability to do so largely hinges on the independence of the judiciary and the political landscape moving toward less centralized power. Similarly, media freedom and the protection of free speech, including laws safeguarding whistleblowers, are vital, as they support investigative efforts to uncover potential corruption. A likely scenario in this context is a reduction of direct capture.
Unlikely: Regulatory capture is fully eliminated
In the EU, various measures have been put in place to promote transparency within its institutions. These include the creation of a transparency register, a code of conduct for commissioners and waiting periods based on institutional hierarchy to avoid the revolving door. Such regulations also encompass a ban on lobbying within one’s former sector. The mandatory reporting of meetings with lobbyists and the involvement of independent organizations, such as Corporate Europe Observatory, are important measures.
The European Ombudsman has the authority to investigate issues related to capture and revolving-door practices, and the European Anti-Fraud Office (OLAF) acts as a safeguard against these practices. Best practices are also shared through organizations such as the Organisation for Economic Co-operation and GRECO, the Council of Europe’s anti-corruption body. Despite these measures, which could potentially be adopted in other contexts, eliminating the risk of capture is unlikely. One reason for this is that effective implementation is crucial, and must address the risk of regulatory capture in the rulemaking process itself.
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